Semi-feudal state barriers interfere with free trade

America is the land of the free - unless your idea of freedom includes a right to build cars and sell them directly to the public, rather than through a third party. For those who try to do that, America morphs into a semi-feudal system of state-law trade barriers and bureaucracy whose ostensible purpose is to protect consumers but whose actual one is to protect incumbent holders of automobile retail franchises, as expert testimony confirmed at a Federal Trade Commission conference on the subject in January.

This system, whose origins lie in a distant past where three major U.S. automakers made the vast majority of cars sold in the United States, and exercised power over dealers accordingly, is badly in need of innovation.

Enter Tesla Motors, the all-electric carmaker from Silicon Valley. Tesla has been taking on the dealers all over the country, and running into resistance from them - including in Virginia, where the company is bidding to open a direct-to-consumer car store in Richmond to go with the one it already has in Tysons Corner. Virginia, like most other states, prohibits new-car sales by anyone but a licensed dealer.

Tesla was allowed to open in Tysons Corner only after it threatened to sue, which forced the state and the Virginia Automobile Dealers Association to negotiate a deal. Now Tesla is once again before a hearing officer of the state's Department of Motor Vehicles, being forced to explain why it would be in “the public interest” to open a Richmond store. The ultimate decision-maker after the hearing, which was recessed until another session April 25, will be the same state commissioner who initially rejected Tesla's Tysons Corner bid.

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A Tesla executive had to make his case in the face of cross-examination by a lawyer for the Virginia dealers association, which, like its counterparts in state capitals elsewhere, is accustomed to getting its way. The dealers' remarkable position is that Tesla can sell in Virginia, as long as it sells through one of them.

In truth, the economic stakes for Virginia's incumbent dealers are relatively modest, given Tesla's market share, which won't be substantial even if its newly announced mass-market electric model does catch on with buyers eventually. What's really key is the precedent that could be set by allowing a car manufacturer, any car manufacturer, to offer its wares directly to the public.

If such a new distribution model proved competitive with the old one, as Tesla - and several experts who spoke at the FTC conference - maintain it might well be, the whole edifice of dealer privilege could come tumbling down.

Dealers maintain that laws protecting their business model ensure that customers have a reliable partner for warranty repairs, and for all the complicated paperwork involved in financing what is, after a house, the largest purchase most people will ever make. For all we know, they're right; but it would seem that the way to settle the matter is to let competitors do battle for the business and have the customer decide. Last time we checked, that's the American way.